What is ''Pension''?

It is a fixed sum paid at regular intervals as regular income during your post-retirement years.

What is a Pension Plan?

It is an investment plan offered by life insurance companies to help create retirement funds. The plan provides a pre-specified and regular pension, preventing financial shortfalls in post-employment years.

How do Pension Plans work for an Individual?

Suppose you are 35 years old and plan to retire at 60 years of age. You estimate is that you will need ₹ 45,000/- per month to maintain your lifestyle post-retirement.

Accordingly, you will need to build a fund within the next 25 years that generates a monthly income of ₹ 45,000/-. This creation of a fund is what a pension plan’s role is: You put in a fixed sum regularly, and your capital grows through investments.

At retirement, you can withdraw a specific percentage of the accumulated funds. The remaining fund generates a fixed, regular income for you during your retirement years.

Types of Pension Plans

National Pension Schemes (NPS)

The National Pension Scheme is backed by the Government of India and regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA). It can be used by private, public and unorganised sector employees to save for their retirement.

NPS allows you to invest in equity and debt funds. The rate of return can vary based on the funds you choose to invest in.
The scheme matures at the age of 60, after which you can withdraw up to 60% of the balance in a lump sum if the total amount is more than ₹ 5 lakh. 40% of the remaining balance must be used to purchase an annuity from a PFRDA-empanelled life insurance company. If the total amount is up to ₹ 5 lakh, you can withdraw up to 100%

Employee Provident Fund (EPF)

The Employees’ Provident Fund is another government-backed pension scheme offered by the Employees Provident Fund Organisation (EPFO). It can be used by employees in the public and the private sectors. In this, both the employee and the employer make contributions towards the employee's EPF account. The total contribution is 24% of the employee's basic salary and dearness allowance, with 12% contributed by the employee and 12% contributed by the employer.
EPF is a retirement scheme meant to be used after you retire, however, you can withdraw your funds prematurely in some cases, such as unemployment or to cover education or marriage expenses, among other things.

How to choose the right Retirement plan?

Below are some key factors to consider while choosing the right retirement plan for you:

• Risk: Your risk appetite is an important factor to consider while choosing a pension plan. If you have a low risk appetite, you can choose low-risk plans that offer a fixed rate of return and are not market-linked. If you have a high risk appetite, you may consider a plan that provides market-linked returns and the potential for high returns.
• Life-stage: When you are young, you have a higher risk appetite. You can look for plans that offer market-linked returns. As you grow older, you may not want your savings to be affected by marked volatility. For this, you may consider plans that offer fixed returns without market risk.
• Tax: It is important to consider the tax benefits and liabilities associated with different retirement plans. Check the tax benefit you can avail of on your premium or contributions and the tax treatment on your returns at the time of withdrawal before choosing a plan.
• Fees: Review the fees and expenses associated with each retirement plan. High fees can significantly impact your long-term returns. Therefore, it is important to understand how these affect your overall gains.

Conclusion

Now, you know what does pension means and how it functions. It ensures financial security in your retirement age, helping you live a happy and fulfilling retired life.